How Does A Renovation Loan Work?

A complete guide to understand how renovations loans work and what are the different options available for you.

If you have just moved into your new home then you definitely want to give your new house a makeover to make it feel like your own.

Do you not have proper resources to put in extra efforts? Then renovation loans is the solution you have been looking for.

In simple words, buying a home and renovating it always go together. You can use smart strategies and techniques to include renovations as a bundle deal in your home furnishing package too.

Do not wait for 7 – 10 years for renovating your house. Also, using all your life-time savings that you earned after a lot of hard work and sacrifice is not at all an option. Once, you have finally planned to buy your own home, take out the money for renovation beforehand from a good lender.

But what options do we have among renovation loans and how do these loans work? Let’s explore what renovation loan means and the way they work.

What Is A Renovation Loan?

If you are a homeowner then renovation loans give you the opportunity to get all the necessary amount for renovating your home. Moreover, renovation loans come in unique and different packages like government sponsored loans or basic personal loans.

It is better to consult your lender before choosing any option. Your lender can help you in finding a way to pay for a single loan but get the amount for both purchasing the home as well as its refurbishment.

Purchase and Renovate Loan

If you are planning to purchase a home that needs major renovation work or in simple words a fixer-upper, then the right mortgage for you is the purchase and renovate loan.

But, what kind of renovation loan is it and what are the benefits associated with it?

In this loan, you lender allows you to borrow not just the money equal to the purchase price of your home but also the expected finds needed to renovate and repair your home after buying it,

There are several benefits of purchase and renovate loan, the most important ones are listed below:

  • The dual purpose feature of these loans give you an option to take just one Freddie loan to pay for both your house as well as its renovation. This way, it assists you in making debt payments simpler and easier.
  • If you are a qualified borrower, then this loan has special requirements for low down payments and low mortgage rates.
  • By using these loans, you can buy a property at a rate below the market value and then refurbish it later to increase its worth.

How Do Home Improvement Loans Work?

If we talk about the specific way renovation loan options work, there are not any fixed rules and regulations. Your home improvement loans depend upon several different factors like your location, credit, and scope of work. It also takes into consideration the position in which you are in your mortgage proceedings.

Hence, you will have different options depending upon multiple factors, but most of them work in a similar manner. Here is the most common method about how this option works if you want to buy a home:

  1. You will become pre-approved for the mortgage and then start finding a home.
  2. Then you will contact your contractor to talk about the renovations and other required mending.
  3. Your contractor will then develop a complete estimate of the amount needed to perform the renovation job.
  4. Your contractor will send the cost estimates to your lender.
  5. Your lender will transfer the information to the home appraiser.
  6. Usually, the appraiser will develop 2 appraisals of your home. The first one calculates the market value of the house in the present. While the second appraisal allocates a new value to the home. This new value is based on the total repairs planned for your house as suggested by your local contractor.
  7. Your loan provider then gives out the loan to the buyer.
  8. During loan creation, the amount required for your house renovations will be kept in an escrow account.
  9. Once the renovations are completed, then this amount will be released after proper inspection

Renovation Loan Options

To help you choose the right option for your next home purchase, we have compiled the best options for you to choose from. This will also guide you about how different renovation loans work.

Fannie Mae Home Style

If you have a good credit score, then Fannie Mae Home Style is the best option for you. By using this loan, you can design your mortgage in 2 kinds of packages of 15 and 30 years. It also allows you to incorporate the renovations costs in your loan amount.

This loan completely depends upon the value of your home after all refurbishment activities are finished. For this purpose, it demands an impressive credit requirement. Now, you can easily analyze this option and check whether or not it goes with your needs.

FHA 203(k)

Unlike conventional renovation loans, FHA 203(k) qualifies those people who have lower credit scores. So, if your credit score is just average and not too good then FHA 203(k) home renovation loan is a suitable option for you.

However, an important thing to keep in mind is that you can get a downpayment of only 3.5%.

These loan packages offer two options:

  1. Full loan
  2. Streamline loan

A full loan does not have any restrictions on the total number of maintenance activities. It only depends on the borrower’s ability to repay the monthly payments.

In the second option, there is a limit on the total number of repairs as well as the kind of renovation activities that you can do to your house. If you think you cannot stay within the required limit then you have to pay a lump sum in advance for additional renovation activities.

If you have a low credit score and you don’t have any issues in paying extra principal fees in advance for your loans, then FHA 203(k) is the best option for you.

EZ “C”onventional

If you neither have a good credit rating nor an average rating, then EZ “C”onventional loans can transform your already planned refurbishments into the actual loan and shape it into a conventional renovation loan.

As long as the planned changes in your home increase its overall value, this loan will cover both the renovations that the borrower wants to do as well as the requirements of the appraiser.


With the advancement of time, we are lucky that the mortgage industry has prospered and developed by a great extent. Today, the borrowers have many renovation loans options available to choose from as per their needs.

If you are interested in buying a home for the first time in your life, then you need to choose from even more mortgage programs. The difficult thing is that almost all of them are worth investigating.

All you need to remember is that the greatest benefit for those who wish to purchase and remodel their home at the same time is to get a loan with a lower single interest rate on the actual amount and just one closing.

Hopefully, you have gained a better and clear understanding of how do home improvement loans work as well as about different renovation loan options available to you.

Sandra Johnson

Sandra Johnson

Sandra Johnson was a few years out of school and took a job as a life insurance agent in California, selling coverage door-to-door for Prudential. The experience taught her about the technical components of insurance and its benefits for individuals and society, as well as the misunderstandings people often have about insurance. She has over ten years’ experience in the insurance industry, having worked as both a Broker and Underwriter, assisting clients across a broad range of industries. At Insurance Noon, Sarah diligently gathers all the required information and curates up pieces to provide meaningful insurance solutions. Her personal value proposition is to demonstrate a genuine interest in always adding value for clients.Her determined approach to guiding clients has turned her into a platinum adviser to multiple insurers.

Insurance Noon is the world's leading source of insurance related content on the web, focusing on industry news, buying guides, reviews, and much more.